Protecting your company from troubled customers and suppliers: as the recession lingers, besides careful cashflow management and fiscal belt tightening, close monitoring of customer and supplier relationships and enacting protective measures have never been more critical.

• Author: Delaney, Mike
• Position: STRATEGY

As the recession stretches into its second year, the business environment is becoming increasingly treacherous. To ensure survival, prudent managers are scrutinizing every facet of their business to locate weaknesses and opportunities. Careful cashflow management and fiscal belt tightening are critical to success, but careful review and analysis of customer and supplier relationships has become just as important.

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If customers fail to pay for goods or services or suppliers fail to deliver critical components, a business can quickly find itself in a precarious financial position. Therefore, companies must now--more than ever--closely monitor their customer and supplier relationships and enact protective measures if necessary.

* Detecting a Problem.

If a company is doing business with another party that may be in financial distress or heading in that direction, the company can take steps to protect itself from significant financial exposure. The critical step, however, is detecting the risk of financial distress early. The finance executive should look for warning signs and work his or her intelligence networks to find every pertinent piece of information available.

Often, employees on the front lines will have their finger on the pulse of the customers and suppliers and can be the first to detect looming problems. The manager should coordinate with these employees and keep abreast of rumors, signs of employee discontent and other negative events impacting customers or suppliers.

Other indicators of potential distress might be deteriorating product quality or delays in delivery by suppliers or increasing days payable by customers. Careful monitoring of credit status and financial condition is crucial in a deteriorating business environment, and a number of information sources are available to help keep tabs on the financial health of customers and suppliers.

* Checking Your Contracts.

Ideally, the company has a standardized form of purchase or sale contract and you are well-versed in its terms and conditions. If the business is like most others, however, that may not be the case. As deals were made during better economic times, contract terms may have been modified, leniency may have been granted or entirely different forms may have been used. As a consequence, you may not have a full understanding of all of the rights and obligations the company may have under the contracts. It is critical to review those agreements...